Public bank stocks fell sharper than the broader market as the Fed’s decision to leave interest rates unchanged left investors without direction, compounded by job gain and unemployment numbers falling short of expectations. Federal Reserve Chair Janet Yellen said in a speech on policy that she believes they will raise rates before the end of the year, saying they are waiting for further improvements in the labor market and more certainty that inflation will run up towards its long term targets. Further, she downplayed the importance of the timing of a rate increase, saying the trajectory of policy was more important. However, some analysts think it is more likely we won’t see the rates increased this year. In either case, global turmoil and concerns about emerging markets sent broader markets and public bank and thrift stocks lower during September. M&A pricing was up year-to-date through September compared to year-to-date pricing through September 2014 although there was one less transaction in 2015 compared to 2014 (see chart below).
The SNL Bank Index dropped 3.6% in September underperforming the S&P 500 which fell 2.6% as banks over $5 billion brought down the total index. The SNL Bank Index for banks under $500 million had the best showing in the month posting a 6.3% increase after dropping 0.9% in August as the most heavily weighted bank in this index announced a stock dividend, followed by banks between $1 billion and $5 billion which gained 1.6% after dropping 2.5% in August. Banks between $500 million and $1 billion increased 1.0% after declining 0.8% in August.
3rd Quarter Review
The third quarter of 2015 proved to be a volatile time for U.S. equity markets. The Federal Reserve’s decision not to initiate the so called “lift-off” was a cause for investor skepticism as many had anticipated that the Fed would finally begin to normalize rates. In its statement, the Fed mentioned global growth concerns and the recent financial market distress as reasons it would hold off on moving on rates at that particular time. Investors also reacted to the ongoing losses in the Chinese equity markets. Chinese equity markets generally remained in a downward spiral that began earlier this summer. With China’s slowing growth, policymakers devalued the Chinese currency in an attempt to boost exports. Investors however, perceived the devaluation as confirmation that the Chinese government was concerned about its future growth prospects. Stocks are also confronting negative seasonal headwinds as September and October are historically two of the most disappointing months for stocks.
The banking sector continues to face elevated regulatory pressures and continued pressure on net interest margins in today’s continued low interest rate environment. The SNL Bank Index decreased by 8.7% during the third quarter of 2015 after increasing by 7.1% during the second quarter and is now down by approximately 5.4% on a year-to-date basis as of September 30, 2015 and down 0.4% on a LTM basis. The SNL Bank Index declined by 6.6% between August 21st and August 25th as China, dropping oil prices and increased market volatility riled the markets. By comparison, smaller banks posted better returns during the third quarter, with the SNL Bank less than $500 million index increasing by 4.9% after increasing by 6.5% during the second quarter of 2015 with the index being up by about 14.0% for the first three quarters of 2015 and 18% on a LTM basis. The SNL Bank $1 billion to $5 billion index posted a modest decrease of 0.9% during the quarter compared to the increase of 5.6% during the second quarter, ending September 30, 2015 up by 3.9% for the year and 14.9% on a LTM basis. By comparison, the S&P 500 was down by approximately 6.9% during the third quarter of 2015 and is now down by 6.8% during the first nine months of 2015 and 2.6% on a LTM basis. The S&P 500 was down by approximately 2.6% during year-over-year period from September 30, 2014 to September 30, 2015 compared to the SNL Bank Index down 0.4% year-over-year.
REGIONAL PRICING HIGHLIGHTS
From a regional perspective, the Western and Southwest regions continue to maintain the highest price to tangible book multiples, as the West reported a median price to tangible book multiple of 1.65x, up 2.4% from 1.61x at August 31, 2015, while the Southwest reported 1.50x tangible book, down 3.9% from 1.57x at August 31, 2015. Both regions reported the highest levels of tangible equity, LTM earnings and net interest margins as of September 30, 2015. The Southwest has seen the largest drop in price to tangible book multiples (9.3%) since year-end 2014 followed by the Northeast (3.4%) while the Midwest reported the largest increase year-to-date (8.9%) and reported the third largest price to tangible book multiple at 1.48x at September 30, 2015. The Mid-Atlantic at 1.36x tangible book continued to be at the bottom of the pricing spectrum.
On a median price to earnings basis, pricing ranged from 14.5x to 16.6x LTM earnings with the Southeast, Southwest, and West at the high end averaging 16.2x while the Mid-Atlantic, Midwest, and Northeast averaged 14.7x earnings. The Southeast region showed the largest gain in September, increasing 1.3% from August to 16.6x in September. The Southwest and West each reported the highest LTM ROAA at 0.96% and 0.97%, respectively, followed by the Midwest at 0.94%.
PRICING BY SIZE
While pricing continues to be proportional to asset size, the smallest banks saw the largest increase in price to tangible book in September, as the most heavily weighted bank in the banks under $500 million index announced a stock dividend. Banks between $5 billion and $10 billion maintained the highest price to tangible book multiple in September of 1.93x, up 3.5% from August 2015. Banks over $10 billion had the next largest price to tangible book multiple of 1.69x, which was down 0.5% from August 2015. Banks between $500 million and $1 billion fell a marginal 0.1% to 1.08x of tangible book, while banks between $1 billion and $5 billion dropped 0.3% to 1.46x. The smallest group, banks less than $500 million, showed a 12.1% gain from August to September to 1.18x, as the most heavily weighted bank in the index announced a stock dividend. Interestingly, when Sheshunoff surveyed community bankers, over 60% of the respondents (135) believed banks needed to be greater than $500 million to produce satisfactory shareholder returns.
On a median price to LTM earnings basis, banks with assets between $5 billion and $10 billion reported the highest multiple of 17.4x, up 2.1% from August 2015, while the largest banks reported a median price to LTM earnings of 15.6x, flat from August 2015. Banks with less than $500 million increased 4.0% from August 2015 to 15.1x at September 2015. Banks between $500 million and $1 billion showed the largest month over month increase, up 4.5% to 14.0x. From a performance perspective, banks with assets between $5 billion and $10 billion reported the highest ROAA of 1.02%, highest net interest margin of 3.69%, and lowest NPAs/Assets of 0.84%, while banks less than $1 billion reported LTM ROAA between 0.76% and 0.82% on much higher NPA levels (greater than 1.15%) with the lowest net interest margins between 3.63% and 3.65%.
Mergers & Acquisitions By Region
Bank consolidation continued at essentially the same pace on a year-to-date basis through September 2015 with 183 transactions reported slightly trailing the 184 announced transactions for the January through September 2014 time period. Approximately 50% of the transactions announced in 2015 reported pricing terms, while 57% of the transaction in 2014 reported terms. Median year-to-date pricing through September 2015 was up 5.0% on tangible book (1.40x), 7.7% on 8% tangible book (1.48x), and 8.6% deposits (16.8%) but was down 2.7% on LTM earnings (22.4x) compared to year-to-date pricing through September 2014. Yet again, the Southwest Region had the highest price to tangible book multiple (1.65x) with the highest earnings and lowest NPA levels. The Midwest followed the Southwest Region on price to tangible book (1.47x) reporting strong tangible equity levels. New England reported the highest price to LTM earnings (25.5x) but reported an ROAA of 0.43% while the Southwest reported a price to LTM earnings of 20.8x while reporting the highest ROAA (0.68%) and strong asset quality (NPAs/Assets 0.4%). While the North Central reported strong tangible equity at 10.4% resulting in lower price to tangible book multiples (1.1x), the North Central reported LTM earnings of 21.1x with a median ROAA of 0.57% and strong asset quality (NPAs/Assets 0.4%).
Compared to publicly traded banks, the 2015 M&A transactions were lower performing financial institutions with a regional median LTM ROAA range of 0.17% – 0.68% compared to a range of 0.83% – 0.97% for publicly traded institutions.
Compared to publicly traded banks, the 2015 M&A transactions were lower performing financial institutions with a median LTM ROAA of 0.52%, LTM ROAE of 5.33% and NPAs/Assets of 1.4%.
More information regarding nationwide M&A activity can be found here.